Good morning and welcome to the Penson Worldwide conference call. Before we begin, I would like to read Penson’s Safe Harbor statement.

Please note that this presentation contains certain forward-looking statements about management's goals, plans, and expectations which are subject to various risks and uncertainties outlined in the Risk Factors section of Penson Securities and Exchange Commission filings.

Actual results could differ materially from those currently anticipated and we disclaim any obligations to update information disclosed in this call as a result of developments which occur afterwards. (Operator Instructions) I would now like to turn the floor over to Mr. Philip Pendergraft, Chief Executive Officer.

Philip Pendergraft

Thank you for joining us here today. I’m here with Kevin McAleer, our Chief Financial Officer. Before I begin today’s presentation, I want to let you know that it is going to be a little bit heavier on numbers than normal, especially in the interest area. We want to make sure that we communicate clearly so please don’t hesitate to ask questions either now or later if we aren’t clear in some areas.

Last night we issued our first quarter news release. We reported revenues of $67.4 million, and net income of $140,000 or $0.01 per share. Excluding $1.3 million in expenses related to severance and the Broadridge transaction, net income would have been just under $1 million or $0.04 per share.

This is generally in line with our previously expressed view that our operating earnings would be down in the first quarter and its in line with our April 20 news release. We continue to believe that this is going to be a challenging year from a financial metric point of view. As you know, there are two major drivers to our revenue stream; interest rates and industry volumes.

We do not expect to see any improvement in interest rates this year. Retail volumes were generally flat to down slightly across the industry in the first quarter, much as we expected. Of note April volumes especially in our US securities business have been strong and were the best since September of last year.

But we think its still too early to say if this is the start of a new trend or whether it will hold for the entire quarter. In the absence of a more normal trading and interest rate environment, our focus continues to be on building for the future. That includes growing our correspondent base, organically and by acquisition, expanding our products and services, and controlling costs and increasing efficiencies.

As volumes and interest rates rebound from the first quarter’s depressed levels, we expect to be well positioned to significantly expand margins and profitability. To that end we’re pleased to have been able to successfully raise $200 million in debt capital. This is the largest capital offering we’ve ever done as a company.

The net proceeds of approximately $193 million have been used to pay off bank debt, and will provide us with capital to support the Ridge correspondents and with additional working and regulatory capital. Now there are four key points to make on this debt offering. First, we have significantly strengthened our overall capital structure by putting in place a seven-year instrument.

This eliminates our reliance on a short-term revolving credit facility for longer-term capital needs. Second, we have raised the capital necessary to move forward with closing the Broadridge transaction, a very important piece of our growth strategy.

Third, we’ve added additional capital to our US securities clearing business which should improve cash management efficiencies and improve spreads modestly. Lastly we put in place a new three-year revolving credit facility which provides additional capital flexibility as we look to position ourselves for improvements in the macroeconomic environment and the growth that this should bring.

All of this has been completed without any deletion of our equity shareholders at current stock price levels. The interest rate on the bonds while impacted by the uncertainty in the European sovereign debt markets was in line with the estimates that we’ve been using to model the Broadridge transaction.

Now the Broadridge transaction continues on track. We expect regulatory approval shortly and anticipate closing this quarter. The closing of the acquisition will result in a significantly higher level of one-time expenses in the second quarter.

Now with regard to organic growth we are pleased to report that the second sequential quarter increase in correspondent accounts since the fourth quarter of 2008, a record pipeline of new and signed correspondents and steady progress in signing correspondents for our recently launched Australian operation.

Now let’s look at the income statement for a minute, please remember that our analysis is based upon excluding one-time revenues and costs from the first and fourth quarter as we articulated in our press release.

Non-interest revenues of $52.3 million were down about $2.4 million from the fourth quarter. Clearing revenues of $34.4 million were off approximately $500,000 sequentially. Now our futures clearing revenue was up just under $1 million or 22%, while Penson Australia contributed $600,000.

These increases were more than offset by the loss of $1.8 million in clearing revenue from E*Trade Canada which finally completed its deconversion in December. As you may recall this firm was originally purchased by Scotia Bank more than one year ago and we had originally expected this deconversion late in 2008 and then again in May, 2009 and was finally completed in December.

Absent the E*Trade impact clearing revenues would have been up $1.3 million or 4% when compared to the fourth quarter. Other revenue of $12.6 million were off about $1.9 million from the fourth quarter. Approximately $1.4 million of this decline was in our execution services business which was negatively impacted by the continued expansion of the penny pricing program on options.

This was in line with trends industry wide during the quarter. Technology revenues of $5.4 million were even with the fourth quarter. This is primarily recurring revenue from existing clients with low custom development revenue which is reflective of the overall business climate.

We are hopeful that as the business cycle improves we will see more development revenue as clients update their technology offerings. In our customer business net interest revenue increased slightly to $13.8 million. This reflects both a small increase in spread and in interest earning average daily balances to a record $5.84 billion, which we were pleased to see.

We’re also pleased to see our strongest quarter ever in our futures segregated cash balances which exceeded $500 million for the first time. Now our balance mix stayed roughly the same. Approximately 68% in cash and the rest in margin and stock loans. At the end of the quarter we had $2.6 billion of cash in FDIC insured bank accounts which was unchanged from the balance at December 31.

We continue to see a slow degradation in bank rates in this program as they fell by nine basis points during the quarter. In our conduit business net interest revenue increased 7% to $1.3 million, a 19% increase in balances more than offset an eight basis point decline in the spread. While we were pleased with the average balance increase in the first quarter we currently expect a lower level in the second quarter.

Now here’s Kevin to review our expenses and our new debt agreement.

Kevin McAleer

Thanks Phil, total expenses increased approximately $1 million from the fourth quarter. The biggest change came in floor brokerage exchange and clearance fees which were up $1.4 million or 19%. Industry per transaction costs are generally the highest in the first quarter as the central clearing agencies reset their pricing schedules at the beginning of the year.

These per transaction costs should decline throughout the year, reaching the lowest levels during the fourth quarter. Interest expense increased 3% due to higher average corporate borrowings. They totaled approximately $100 million for the period versus $84 million in the fourth quarter.

As we have discussed we are continuing to grow our customer balances and interest earning assets which caused us to increase borrowings on our revolving line of credit. Now partially offsetting these increases were declines totaling approximately $900,000 in employee compensation, other expenses, and communication and data processing.

This reflects cost cutting designed to bring overhead in line with current market activity. We are continuing to review all expense areas given the difficult operating environment. Now EBITDA was $10.8 million versus $17 million in the fourth quarter and $9.6 million in the year ago quarter.

Now let me turn to the new debt, we’re paying an additional $1.47 million in corporate interest expense per month for a total of $4.4 million per quarter. This is the cost of the new debt less the cost of our bank debt which has now been paid off.

On an annual basis approximately $6.5 million of this expense has been factored into our Ridge acquisition model which is accretive including these costs. In addition we estimate that addition capital provided by the notes offering will reduce operating interest expense by approximately $360,000 per month or $4.3 million annually through improved cash management efficiencies.

On an annual basis based on our current customer base and balances we anticipate a decline of approximately $4.4 million in net income related to this higher interest expense. We believe that this impact will decline modestly next year as we put more of this capital to work effectively through growing customer balances.

For the balance of this year however we anticipate a decline of approximately $3.6 million in net income related to this higher interest expense. This is slightly higher than the annualized run rate I just mentioned and that is because of the timing difference between the closing of a bond offering which was yesterday, and the anticipated closing of the Ridge transaction, which we anticipate will have an additional $600,000 impact on net income in the second quarter.

Now here’s Philip for a more detailed update on the Broadridge transaction.

Philip Pendergraft

Thanks Kevin, as we’ve indicated earlier everything continues to move along on schedule with closing anticipated this quarter. We’ve narrowed our expected initial purchase price range to between $43 and $57 million. We expect to issue no more than 2.5 million shares related to this purchase with the balance to be financed by Broadridge in the five year seller note at LIBOR plus 5.5.

The number of correspondents that we are acquiring will total around 100 which will make us the nation’s number two securities clearing firm based on a total of approximately 400 correspondents. Our latest estimate is that the Ridge correspondents will add more than $600 million in average interest earning balances which will be a little bit over a 10% increase for us.

For our April 20 8-K, our models indicate EBITDA contribution of approximately $12.6 million in the first year based upon $48 million in acquired revenues. Since we anticipate first year revenues will be in the $50 to $60 million range, depending on market conditions, we anticipate overall EBITDA contribution to be higher as well.

We continue to expect that the transaction will be modestly accretive to EPS this year with the impact increasing next year. We also continue on schedule with plans to outsource certain functions to Broadridge starting with processing our Canadian business on Broadridge’s BPS platform later this year.

These moves are expected to significantly reduce costs. Once we convert all of these functions we expect to reduce our costs by about $7 to $9 million a year based on current volumes. And again we should begin to see the impact of those cost reductions in the fourth quarter this year and they will scale up through the third quarter of next year if we stay on our current timetable.

Turning to new business we reported our second sequential quarter increase in correspondents since we began our qualitative correspondent review in the second quarter of 2009. At March 31, 2010 we had 297 revenue generating correspondents compared to 290 at the end of the December, 2009 quarter,

Not reflected in that count is an impressive pipeline of 38 new correspondents versus 27 at the end of the fourth quarter. That pipeline includes Trade King in the US and Austock and DJ Carmichael in Australia. Now for the first quarter Australian results reduced EPS by about $0.03. Given the level of client signings, which are running ahead of our expectations, and our current conversion schedule which is full, we anticipate being on plan and profitable for the year.

Overall we’re very pleased with the progress we’re making in this market. For the first time there is a viable independent alternative clearing firm in Australia. That is particularly appealing to mid tier full service brokerage firms. Until we entered the market their only option for clearing had been larger brokerage firms with whom they compete.

Because we’re global, we can be a true asset to helping our correspondents in Australia and around the world implement their growth strategies both inside and outside of their home markets. Now looking ahead we don’t want to be seen as presenting guidance but we would like to provide you with some additional information about what we do know.

Typically trading volumes are higher in the second quarter as compared to the first and the cost of clearing as a percentage of net revenues is lower. April and early May have certainly followed this volume trend. We also anticipate some improvements in Australian results as new clients come on line this quarter.

We are concerned about some weakness that we’ve seen in stock lending balances so far this quarter. Although we saw the same trend early last quarter and still finished ahead of plan in this business overall for the first quarter. As we indicated earlier we will have the impact of higher interest costs this quarter with little or no offset expected from the Ridge correspondent revenues.

We’ll also have more Broadridge transaction related costs both from closing the debt deal and the acquisition transaction itself. Overall while we had indicated that we expected [break in audio] – thank you sorry for the disruption, so, as we had indicated earlier we will have the impact of higher interest costs during this quarter with little or no offset expected from the Ridge correspondent revenues.

We’ll also have more Broadridge transaction related costs both closing the debt deal and the acquisition transaction itself. Overall while we had indicated that we expected the first quarter to be the lowest quarter of the year from the earnings perspective we now believe that the second quarter operating results could be similar depending obviously on overall industry volumes.

On the upside we continue to maintain the earnings power of the company. Based on the size and composition of our interest earning balances in the first quarter every 25 basis point hike in the federal funds rate should increase net interest revenue by approximately $1 million per quarter or about $4 million a year.

As we’ve said repeatedly we’re very focused on the things we can control including adding correspondents and increasing customer interest earning balances. We believe that this is the right course of action during these difficult macroeconomic times.

That concludes my formal remarks, and we’d be pleased to open up the call to questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Vinciquerra - BMO Capital Markets

Michael Vinciquerra - BMO Capital Markets

I just wanted to ask on your pipeline obviously growing very nicely but its been strong now for several quarters and we really haven’t seen any net growth. You had growth in the futures side this quarter but nothing on the securities side, can you give us a sense for, we’ve been expecting for a few quarters that we would eventually start to see an increase but you’re still apparently pairing some of your other correspondents, can you just talk about the growth trends please.

Philip Pendergraft

I think we are pretty well done with the pairing process. I think what we saw in particularly on the securities correspondents camp this quarter was not largely but certainly some of the firms that fell out of the camp this quarter were firms that had been transitioning over the last couple of quarters as a result of some of the changes that we made.

I do think we’ll begin to see the securities camp start to grow again in the second quarter. And we are, its difficult to see in terms of new revenue growth because some of our existing correspondents overall because of what’s gone on in the market the last couple of quarters from a volume perspective we’re actually seeing a little bit, we’re adding new customers but we’re not seeing a lot of revenue growth right now because overall book of business from a revenue perspective is not growing.

So I’m hopeful that some of the trends that we have seen this quarter for volume that we will begin to see some of the impact of that growing base of correspondents as volume picks up.

Michael Vinciquerra - BMO Capital Markets

The pipeline had a record, should we presume that its going to take a little extra time to get all these clients converted and therefore instead of say a two quarter typical conversion process it may take three or four to kind of work through your entire pipeline.

Philip Pendergraft

I think its safe to say that it will take us a little bit longer although a number of, so probably four of the firms maybe five of the firms in the pipeline are from Australia and those I believe we have three conversions scheduled, we have four conversions scheduled in Australia between now and the end of the quarter.

So Australia we’re going to move along faster. We’ve got a full schedule over the next really four or five months but I think outside of Australia it might run a little bit longer than normal.

Michael Vinciquerra - BMO Capital Markets

On the debt, one question it looks like you had about 3.5% worth of fees just looking at the discount from the 200 of the $193 million net, will those also roll into through the income statement in terms of amortizing those costs in and I assume those are all included in the numbers you provided.

Philip Pendergraft

Those are included in the numbers we provided and they will be amortized, the majority of them I think are amortized at this point but those are included in the numbers.

Kevin McAleer

It will be all those costs will get amortized.

Michael Vinciquerra - BMO Capital Markets

And just on your comments you mentioned I think a $4.3 million benefit from improved cash management, you lost me there a little bit, but I missed that point there.

Kevin McAleer

The point I was trying to make is that with the additional capital after we pay off the bank facility which we did yesterday, that we’ll be able to reduce our overall operating costs and interest by having the ability to manage the cash more effectively. So we expect to see $360,000 per month or that’s how you arrive at $4.3 for an annual number which would lower our borrowing costs is the point I was making.

Michael Vinciquerra - BMO Capital Markets

Manage your money more effectively, I’m not sure I understand how you mean.

Philip Pendergraft

That’s largely a function of regulatory cash management. As you know we’re required to segregate excess customer balances and that’s what, you see that on our balance sheet. Our ability to manage the segregation process is somewhat dependent on the level of overall capital we have in the business.

And so sometimes you’ll see on our balance sheet short-term bank loans or stock lending balances that tend to be that go up and down depending on working capital needs and the way we manage that segregation process. And the more excess capital we have in the business the less funds we borrow as a result of the segregation process and so we had a multiplying effect. Its not just the impact of $70 or $80 million in extra capital, we had a multiplying impact and that we anticipate that the excess capital will meaningfully reduce our overall short-term bank debt expense.

And so that’s what Kevin is driving at. We’d be happy to walk you through the calculations in some detail if you’re interest off line.

Kevin McAleer

That’s the exact same impact we had and we had the good results from the IPO money, so its pretty much we have history with this.

Operator

Your next question comes from the line of Howard Chen - Credit Suisse

Howard Chen - Credit Suisse

Just following up on Michael’s question on capital from a different angle, just post the recent capital raise and the puts and takes after that, I’m just trying to get a sense of how much growth capital you believe you have to further install new correspondents and balances after Broadridge comes in and things stop moving.

Philip Pendergraft

Of the call it $190 million net proceeds, $100 million went to pay off the revolver, $50 needed to support the Broadridge business that gives us about $40 million worth of additional gun powder. But then on top of that we do have an additional, we’ve now put in place a much longer-term of revolving credit facility that is now $75 million facility that’s three years in time that has an accordion feature that we could take it up to $125 million.

So that gives us if you added all of that up, its $160 million or so in additional capital capacity that we didn’t have prior to doing this. So getting the revolver converted from a six month or a year facility to a longer-term facility was contingent upon getting this debt offering done and so overall we have not improved the tenor and the strength of our capital structure, we’ve increased the capacity pretty meaningfully.

Howard Chen - Credit Suisse

And then you obviously have a great view of your pipelines and potential business wins that flexibility that you just stated, do you think that gives you ample amount of running room to grow the business organically.

Philip Pendergraft

Yes, I do not believe that, I believe we have plenty of capital for the business in the pipeline and for the foreseeable future. In fact I don’t think, I’d be surprised if we, let me say it a different way, I’d be really pleased if we needed to draw on the revolver in the near-term because it would mean that we’ve really grown our customer base, but I think that that’s unlikely for at least the near-term that we have pretty good amount of gun powder just from this debt offering.

The revolver gives us a lot of flexibility.

Howard Chen - Credit Suisse

Then just as a follow-up switching gears to operating expenses, clearly you’ve noted a few times the fairly muted first quarter activity levels, the headwinds of interest rates, but after you install Broadridge and we know there’s moving parts related to market activity, but could you speak generally to your ability to contain expenses or the appetite to just reduce operating expenses generally throughout the franchise.

Philip Pendergraft

We’re looking at this really hard. Obviously the last year or so we have not seen the kind of revenue growth we’ve seen historically and that puts a lot more focus on cost control and containment. This is a little bit of an awkward time for us related to that because we are really busy with the Broadridge transition.

And so where in a normal environment without the Broadridge transaction imminent or imminently closing, we might have a little more flexibility around our cost structure. We’re working very diligently to prepare the platform to effectively work with 100 new clients and so that does make it a little bit more complicated than in a normal environment, but we are very focused on it.

Howard Chen - Credit Suisse

I know clearly just lots going on in terms of the Broadridge integration but just could you just help us visualize where that flexibility would come from in a more normal environment if you weren’t going through that.

Philip Pendergraft

I think in a more normalized environment we’d have to look hard at personnel costs as being an area of where we could see some savings. I do think we’ll see some savings in the personnel area once we begin the transition to the Broadridge technology and their outsourcing platform. And then I think in some of our technology line items where we’re pretty focused on technology integration and the conversion transition plan and as a result we, I think we have a little bit higher than normal costs on the technology side.

Operator

Your next question comes from the line of Patrick O'Shaughnessy - Raymond James

Patrick O'Shaughnessy - Raymond James

I wanted to ask you a current events question can you talk a little bit about the type of activity that you saw yesterday anything about kind of more algorithmic trading and how that might have played a role in the market events yesterday and then I guess just more broadly speaking your thoughts around how the crash yesterday and subsequent rebound might impact some of the market structure discussion going on with the SEC.

Philip Pendergraft

First of all I don’t know that I know a whole lot more than you do about what caused the volatility yesterday. None of our clients were, if there was some kind of break in somebody’s system it wasn’t anybody, we have no visibility into that. It wasn’t any of our clients.

And I think it would be unlikely given the risk controls that are built into our clients’ systems that that would happen. And so specifically with regards to Penson, its been a busy 24 hours. I think as you might imagine in this type of environment we are very focused on risk. We’re very focused on monitoring exposure in real time and that we took a number of actions yesterday related to intra day margin calls and liquidations that we would only take in an unusual environment.

Processing I’m really pleased, for our US business we had a record night last night and we processed that business with no problem at all and all of our systems came up on time this morning and we didn’t have, we really had no issues. And that’s I think a testament to the investments we’ve made over the last 15 months since the fourth quarter of 2008 which was really the last time we saw this kind of volatility.

From a market structure perspective I think clearly the events of yesterday are going to cause some significant additional scrutiny around some of the market structured discussion at the SEC and in converse. We continue to believe and support limiting access into the marketplace. We believe that access by non-regulated entities direct into the marketplace is destabilizing and creates risk for all participants.

And we think that the, we’ve weighed in pretty heavily on this and we think that the Commission should limit or eliminate that kind of access.

Patrick O'Shaughnessy - Raymond James

Next question I had was looking at your client balances, it was basically flat quarter over quarter, when we look at the client balances of the online brokers that we follow those tend to be up 3%, 5% or so quarter over quarter so can you walk me through the trends that you saw why your balances were flat whereas maybe other people saw theirs go up and obviously the market improved fourth quarter to first quarter.

Philip Pendergraft

I don’t have much color on that. We saw really strong growth in the fourth quarter and so I think if you look at the two quarters together perhaps we probably grew 5% or 6% on average. There’s nothing, we didn’t lose any significant balances there so I’m not concerned about it and there was nothing particularly unusual.

So that’s really all the color I can give you.

Patrick O'Shaughnessy - Raymond James

And then a quick math question, E*Trade Canada if I heard right you said basically it was a loss of $1.8 million revenue because they went through self-clearing when Scotia Bank brought that in house—

Philip Pendergraft

It was actually, it was $1.8 million in clearing revenue and there’s about $2.2 million or so in overall revenue for the quarter.

Patrick O'Shaughnessy - Raymond James

So if my math is right, that’s about 5% of your clearing revenue, did they grow a lot in the last couple of years relative to some of your other firms because I didn’t remember them being that large of a component of your business.

Philip Pendergraft

No E*Trade Canada has been in our top 10 since, for the last several years. They’re the, because of the business model their business model, they were a, their clearing revenue was a much higher component then overall, interest revenue was much smaller in their case than with a normal customer relationship so I think certainly much higher from a clearing revenue contributor than on the interest side.

Operator

Your next question comes from the line of Mark Lane - William Blair & Company

Mark Lane - William Blair & Company

My first question is just back on capital management in terms of talking about a cushion and what your capital needs are, if you go back a year ago regard to your capital management, before you did the convert note the message you were sending was that you had excess capital and then you raised the $60 million in May of last year, and you drew your bank lines from at the end of the second quarter from $50 million to $100 million through the first quarter of this year, and still had the excess cash from the convertible note and then you raised an additional $50 million above what you needed for the deal and it sounds like you still don’t feel like you have excess capital. It feels like you’ve underestimated how much capital you need to run your business. I just don’t understand, you’ve eaten up $100 million of capital in the last four quarters it feels like and you’re saying that you feel like you have a cushion to grow your business, why don’t you have a cushion to do something else beyond running your business, its confusing to me.

Philip Pendergraft

So a couple of points here, first of all with this offering we clearly have, we’ve put more capital away than we needed to. We have used, if we look back over the last year, we have put about $10 million in Australia. We’ve made the [Shonefeld] earn out payment in cash rather than stock. That took about $25 million. So we have used some capital outside of the business as well.

But we’ve also grown balances and as the balance sheet grows we have to have more capital to support the business and then frankly this is a much, the operating environment today from a capital perspective is much changed over the last two or three years. Clearly after the results of, after what happened in the industry in 2008 counterparties and regulators are looking for much more capital cushions than they have in the past.

And so while it may not be absolutely required from a regulatory perspective we’re trying to be prudent and make sure that we have plenty of capital in the business and that, so that all of our counterparties and clients remain very comfortable in our ability to support the business and its growth.

And then lastly the capital markets I think we’ve seen clearly over the last couple of years that the capital markets are not always open. And so it was our perspective that given that we could, we thought about just doing $150 million on this offering and if we’d known that we could come back and get another $50 million if we needed it in six months or a year, we probably would have done that.

But I think if we’ve learned anything over the last couple of years and maybe over the last week, is that things change very rapidly and that the capital markets are not always open and so we chose to be prudent rather than, sure we could have saved some money by not doing that, but we think in the long-term we’re trying to build a business and it is better to be prudent, so I don’t like the additional, fundamentally the incremental interest costs that we’re paying here is really on the excess capital that we took [inaudible] because we were able to be, the cost savings and other, and the Ridge transaction account for most of the rest of the additional interest expense.

And I don’t like paying that any more than anyone else but we just felt like that was the prudent thing to do.

Mark Lane - William Blair & Company

So if your business grows between now and the end of the year as you see it with your pipeline given that cushion why would you need to draw down on your credit facility at all.

Philip Pendergraft

We have no intention of doing that.

Mark Lane - William Blair & Company

Through the end of the year.

Philip Pendergraft

I actually don’t envision that we’ll need to do that for the foreseeable future.

Mark Lane - William Blair & Company

Okay back on the Broadridge I was a little confused because you were saying that the purchase price you thought was $43 to $47 million which would imply if you’re looking at a 90% of the revenue a number under $50 million but then you were saying that you think the annual revenue is $50 to $60 million, could you just clarify that.

Philip Pendergraft

I don’t think I explained that very well, because we’re really talking about two different things. The initial purchase price is based upon a calculation of revenue that looks back over the last six months and includes very nominal revenue for any new correspondent signings. So Broadridge has signed a number of new correspondents in the six months since the deal was announced.

They will contribute to revenue as we go forward but they’re not in the initial purchase price so the purchase price we believe will be set around between $48 and $50 million in revenue. That will be made at closing and then in about a year we’ll look back on the new customers that started during that, that there was no track record for, and there’ll be some kind of adjustment for those new customers less any customers we lose during that time period.

So we think the number, that the year one number that we actually get will be between $50 and $60 million which will mean that there will be a true up at the end of the year that will increase the seller note by whatever, by a few million dollars based upon that additional revenue.

Mark Lane - William Blair & Company

That’s the last adjustment.

Philip Pendergraft

Yes, that is.

Operator

Your next question comes from the line of Chris Connors – Sandler O’Neill

Chris Connors – Sandler O’Neill

Just want to try one more time on the E*Trade Canada question, with that $1.8 million you mentioned initially you said that they ceased being a customer in December right.

Philip Pendergraft

Yes, about the second week of December.

Chris Connors – Sandler O’Neill

So then the impact in the, okay so the second week of December, so its basically the full quarter.

Philip Pendergraft

Its pretty much apples to apples, full quarter versus nothing.

Chris Connors – Sandler O’Neill

And then looking forward as you think about we know what you have in your pipeline but then we also know that the situation with thinkorswim is likely to change here so how do you view that, what’s you’re adding versus what’s likely to go away and maybe can you review what thinkorswim the different parts of that.

Philip Pendergraft

Maybe the best way to look at this is to say that the piece of the thinkorswim business that we’re going to lose which we think is going to be about half of the business sometime late this year or first or second quarter of next year. We think that that will largely be replaced by the Trade King business this coming year in July.

And then we are continuing to move forward with TD Ameritrade on foreign exchange and futures and launching those products into their customer base. That’s on their time schedule not ours but we’re continuing to make progress moving toward that launch and so we’re hopeful that particularly as we look into next year that we’ll begin to see some increase in revenue related to those products.

Chris Connors – Sandler O’Neill

Do you consider Ameritrade within that 38 companies in the pipeline or are they—

Philip Pendergraft

No.

Chris Connors – Sandler O’Neill

And then shifting gears a little bit here, looking at the clearing expense at least modeling as a percentage of clearing revenue it was unusually high and I’m not sure that’s the right way to look at it but let me know if it isn’t but just was there anything unusual going on that’s shifted that as a percentage of thinking about floor brokerage exchange clearing as a percent of clearing fees.

Philip Pendergraft

Really I think two things there, one first quarter is always the highest quarter for those expenses as a percentage of revenue because all of the central counterparties essentially start their billing cycles over at the beginning of the year. Now but we continue to see a stronger, the part of our business that generally is growing more quickly than the rest is our options business.

And our costs of clearing as a percentage of that business is certainly higher than on the equity side. So the OCC charge as a percentage of that business is higher than what we pay on the equity side so I think you’re seeing a little bit of both. You’re seeing that asset class growing faster and you’re seeing overall higher expenses because we’re in the first quarter.

Chris Connors – Sandler O’Neill

What about anything internationally there, would that also be effecting it or not.

Philip Pendergraft

Maybe a little bit, but I think those two trends are really the most meaningful.

Chris Connors – Sandler O’Neill

And then you made the comment about that you believe second quarter results could be similar to the first quarter, so just to make sure I get the puts and takes here, volume clearing revenue is implied by volume looks like its starting pretty well, but then you have the negative impact of the interest expense you’re carrying without closing the Broadridge, those are really the two main issues going on or are there others.

Philip Pendergraft

I think that’s right. I’m a little bit concerned about our stock lending book right now, that’s running a little bit behind where I would like to see it but we did the same thing last quarter and finished in a bang so I don’t know that, I think its too early to draw too strong a conclusion there. And obviously volume is the wildcard here. The volumes that we’ve seen through much of April and certainly over the last couple of days would, are very positive.

Chris Connors – Sandler O’Neill

But I think you also made some comment about on the net interest side that you’re seeing some lower deposit rates, is that right.

Philip Pendergraft

We saw that in the first quarter that we actually were able to increase our spread overall by two basis points despite the fact that our FDIC bank program where we have $2.6 billion invested, we actually lost nine basis points on our average spread in the quarter. So I would expect that we’ll see a slow continue to see a slow degradation in the FDIC rates or in the rates on the FDIC accounts.

Its certainly not, I’d be very surprised if it was anything close to nine basis points. That was unusually high.

Operator

Your next question comes from the line of Dave Capps - JPMorgan

Dave Capps - JPMorgan

Congratulations on completing the bond deal, with regard to the volume that we’re seeing now I was hoping that as you said it should be a benefit to the business but is there any way to look at the volume from one quarter compared to the previous and quantify at least ballpark how much of a benefit that could be.

Philip Pendergraft

Its certainly not dollar for dollar but I think that generally speaking we found its not perfect, but we found that the change in NASDAQ volume is probably the best metric to watch. We still even though our New York Stock Exchange business has grown pretty dramatically we’re still the largest market that we participate in is the NASDAQ market. So I think NASDAQ volume is probably the best indicator.

Of course the problem is that we have some meaningful international businesses as well and so volumes in those markets can have an impact on the growth of clearing revenue as well.

Dave Capps - JPMorgan

And then with regard to the stock lending, obviously use of it hasn’t really started out well, how well does that track with the overall market volume.

Philip Pendergraft

We have actually, we haven’t found volume to be a great metric for that business. Its more the I think the absolute level of interest rates in the marketplace and the, its more the absolute level of interest rates in the marketplace in terms of our spread in that business and then more the frankly the level of the market because obviously the higher the market is the more market value in the securities you’re lending out which increases your balances that you’re earning interest on.

So a little bit of the decline that we’ve seen this quarter has been that the market is well off of its highs this year but its also that demand seems to be down just a little bit and as we talk to other people in the industry that seems to be somewhat of an industry, we’re hearing it at a number of stock lending desks.

So that’s anecdotal but it seems to be more a slow down overall.

Dave Capps - JPMorgan

And then with regard to the pipeline would it be possible for you to break that out in terms of the portfolio which is futures related and the portion which is not.

Kevin McAleer

We can do that, give me a second.

Dave Capps - JPMorgan

In the meanwhile while we’re waiting for that, my only other question is you’ve spoken in the past about continued international expansion for example into Brazil, when do you think something like that could be completed.

Philip Pendergraft

We’re not planning at this time to put anything on the ground in Brazil other than potentially a sales office. We are however working with some large execution providers in the US where we are providing clearing and custody services for northbound order flow for northbound customers and we are continuing to expand our capabilities to execute in that market remotely.

So I don’t know that I have a, there’s really not an end date, we’re continuing to try to grow our visibility there and grow our customer base down there but I don’t think we’re going to be establishing a local presence for local clearing there any time in the near future. That’s really not in our plan.

Dave Capps - JPMorgan

It sounds like bit by bit.

Philip Pendergraft

That’s an incremental strategy there, it is a market where there is a lot of opportunity to clear northbound business particularly in the US markets and where we have a number of US customers that are interested in clearing or in executing in that market and so we’re working with some existing providers down there to get good access to that market.

Kevin McAleer

Its 16 futures in the pipeline.

Operator

Your next question comes from the line of Scott Applebee – Applebee Capital Incorporated

Scott Applebee – Applebee Capital Incorporated

Just a couple of follow-ups on the expense side, I thought I heard you that you said that Broadridge would be taking over approximately $7 to $9 million per year of Canadian expense.

Philip Pendergraft

The number is right, its going to be $7 to $9 million in cost savings but that will be in Canada and the US.

Scott Applebee – Applebee Capital Incorporated

And so is that a number that literally comes right off of your entire expense line.

Philip Pendergraft

Yes, we are contractually guaranteed a minimum of 22.5% cost savings on the technology and people that we outsource to Broadridge and we know what we’re spending on the technology side so that’s a pretty easy number and on the people outsourcing side that’s a little bit more influx but that’s why there’s a range of between $7 and $9 million but that should come directly off our expense line.

Scott Applebee – Applebee Capital Incorporated

And no corresponding revenue loss.

Philip Pendergraft

No.

Scott Applebee – Applebee Capital Incorporated

And then back to this floor brokerage number and I know that you mentioned that Q1 often well one there is a reset and two they’re higher, but this is my, where a little bit of my confusion is, is a year ago on the same top line clearing commission fees that floor brokerage number was $7.4 million versus $9.1 so can you just help to clarify that a little.

Philip Pendergraft

Its possible we had some year end rebates in last year’s number that we didn’t receive this year. And certainly our options business is a bigger component this year than it was last year. I’ll have to come back to you on the rebates, I’m not sure about that.

Operator

Your next question comes from the line of David Scharf - JMP Securities

David Scharf - JMP Securities

Just a few follow-ups, in light of your comments about options clearing costs, can you provide us a little update on just what the mix is currently for options transaction flow, how that’s been trending and based on your expectations if that should be coloring how we’re modeling execution costs going forward.

Kevin McAleer

I’m looking at that right now, why don’t we go to the next question.

David Scharf - JMP Securities

Following up on the topic of mix on a no names basis, no need to disclose individual correspondents, but in light of the impact E*Trade Canada had, can you give us a sense for what percentage of revenue now your top 10 are accounting for and how that’s trending as well.

Philip Pendergraft

The top 10 is 29% and the top customer is 6%.

David Scharf - JMP Securities

And those are both excluding E*Trade Canada.

Philip Pendergraft

Yes.

David Scharf - JMP Securities

And lastly I appreciate the disclosure the break down on the interest side, I just want to make sure I understand completely what is the build up to your comments about modest accretion this year and next from Ridge, you had mentioned the incremental impact of the senior note offering is $4.4 million a quarter, that’s 17.6 annually. Does the 17.6 of incremental annual interest costs does that also take into account the Ridge seller financing.

Kevin McAleer

No, jus the high yield.

David Scharf - JMP Securities

So when we think about pro forma Ridge and pro forma the high yield deal we’re talking about incrementally what, close to $20 million more interest costs.

Kevin McAleer

For Ridge?

David Scharf - JMP Securities

For everything, you’ve got 17.6 annually incremental interest cost from the high yield deal, right, and you’ve got what, $30 million of seller financing from Ridge.

Kevin McAleer

Yes, ballpark.

David Scharf - JMP Securities

Roughly 6%.

Kevin McAleer

I think you’re right, about $20 million.

David Scharf - JMP Securities

So we’re at about $19 million of incremental interest costs and we’ll ignore the impact of additional shares issued as well, but obviously to be accretive on an annualized basis we need more than 19 million operating profit and I think you had commented the by 2012 perhaps we should see about 5, 6 million of annual cost savings from the new outsourcing arrangements.

Because I really want to understand the build up of how we get to accretion here.

Philip Pendergraft

So first the cost savings we anticipate will be between $7 and $9 million pre-tax and we should see them, they’ll begin in the fourth quarter of this year and they will ramp up until we anticipate the third quarter of next year. So we should exit the third quarter of next year on a run rate of $7 to $9 million.

We’re not looking at that from an accretion perspective. When we—

David Scharf - JMP Securities

Let’s just stop there, you’re not looking at that, [inaudible] savings from the new contracts entered into—

Philip Pendergraft

When I say its accretive we’re not looking at the cost savings just the revenue and the, associated with the transaction but with the correspondents we’re bringing in—

David Scharf - JMP Securities

Okay I thought that factored in was the cost savings from the new contracts. Okay so now we have a higher hurdle with respect to contribution from the new correspondents.

Philip Pendergraft

Correct, now so I want to be clear when we talk about accretion we are not looking at the, we’re looking at the level of, we’re looking at two pieces of debt associated with that. We’re looking at the seller note and the $50 million in capital associated with the Broadridge deal. So that’s the interest expense that we factored into our model when we say that transaction will be accretive.

That will not offset at least this year, the incremental interest expense associated with the additional capital that we raise.

David Scharf - JMP Securities

That’s very helpful clarification. I think generally when I hear the comment accretive its usually related to all of these in combination. So we’re just talking about effectively $80 million of incremental debt, the seller financing and the $50 million of, okay, but obviously we’ve got a fair amount more.

Kevin McAleer

Just to give you a flavor equities a year ago plus were running 70% of our business. As Philip mentioned options have growth dramatically so as a mix we’re closer to 50/50.

David Scharf - JMP Securities

And then when we throw in futures, its fair to say equities are less than 50% now.

Kevin McAleer

Yes.

Operator

Your final question comes from the line of William Matthews – Post Advisory Group

William Matthews – Post Advisory Group

I just wanted to understand the cash balance at the quarter it was $94 million but I know some of that is earmarked, if you could just kind of go through I believe about $60 million is regulatory capital for the Ridge acquisition and then what about the cash or the non-seller financing [inaudible] cash off the balance sheet or will that be shares issued. If you could just go through the $94 million what of that is earmarked for the Ridge acquisition and for other things.

Philip Pendergraft

Actually none of it is earmarked for the Ridge acquisition. If you’re talking about the 3/31 balance sheet, no, that is working capital in the subsidiaries and those cash balances frankly change every day depending on our cash settlements and really don’t have anything to do with the Ridge transaction.

But the funds, the capital necessary for the Ridge transaction we actually raised this month. You’ll see and so that will be reflected in our capital balances of the regulatory operating subsidiaries when you look at the next quarter numbers but it may not necessarily be in cash because it’s the cash at the operating company level is very much dependent on the settlement cycle of each one of those businesses on a daily basis.

William Matthews – Post Advisory Group

The financing for the Ridge acquisition the portion that’s not going to be the seller financing is that just going to be cash.

Philip Pendergraft

No, it will be equity.

William Matthews – Post Advisory Group

So everything constant pro forma we should see cash balances roughly how much higher than they are as of 3/31 pro forma for the high yield deal.

Philip Pendergraft

At the parent company we intend to keep we have indicated we intend to keep between $10 and $15 million at the parent company. That should be pretty constant. At the broker dealer level there’s really no way to answer that question because its completely a function of our daily settlement cycles and where we, and whether we have increases in customer deposits or in margin loans or in stock, its really, those numbers change pretty meaningfully every day and its really not accurate to think of those as part of really as free cash.

That’s cash in the operating business that—

William Matthews – Post Advisory Group

Could be necessary or could be used—

Philip Pendergraft

Obviously we have access to regulatory capital so to the extent we took regulatory capital out of the broker dealer we could increase the cash balance at the parent but the actually cash balance at the operating subsidiaries is really, I don't think that’s the number you’re really driving at.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Philip Pendergraft

Again thank you for your questions and your participation, sorry for the technical difficulties. We appreciate you joining us today and for your interest in Penson. Our job in today’s environment is pretty clear, to keep growing the business, so that when the macroeconomic cycle improves we’re in a better place so that we’re able to benefit from those changes and really grow revenues and grow profitability.

And we look forward to talking to you again at the end of our second quarter. We do have two conferences we’ll be attending over the next couple of weeks. Next week we’ll be at the JMP conference in San Francisco. We do have our Annual Meeting in Dallas on May 27th and would certainly invite any of you to attend that would like to.

And then we’ll be in New York the first week of June for the Sandler, O’Neill conference. That concludes our time today.

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